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Why China’s food inflation of 6.5% supports fertilizer demand

Xun Yao Chen

5 key indicators that drive potash stocks' outlook (Part 4 of 6)

(Continued from Part 3)

China’s food inflation

The CPI (Consumer Price Index) is a measure of the overall price of goods that the common household consumes. The most significant component of the headline CPI to farmers is the food CPI. The faster it’s rising, the better for fertilizer stocks. Conversely, falling growth can be a negative.

China Food Consumer Price Index 2013-11-29

With ~18% of the world’s population, China’s food prices are of critical importance to the global fertilizer market. Depending on the type of fertilizer, consumption in China can make up from 18% to 31% of global use.

China’s food inflation picks up

In October, China’s food inflation rose to 6.5%, up from 6.10% in September. Prices of fresh vegetables went up by 18.9%, contributing to 27.8% food inflation. Prices for meat, poultry, and related products rose 6.6%, affecting 24.7% of food inflation.

Higher demand, lower supply

Rising food inflation reflects excess demand. This is driven by either rising demand or poor supply. Drought, frost, and flooding were factors that negatively affected food supply this year in China, while the rest of the world saw much more favorable weather, yield, and production.

Faster economic growth since China accelerated its spending program to keep its 7.5% growth target for 2013 is driving national income. So demand for food—particularly vegetables and meats that are considered more luxury fare—is on the rise.

Higher food prices are positive for stocks

If food prices in China continue to rise, expect China’s demand for fertilizer to increase as well. This would be positive for fertilizer stocks and ETFs like Intrepid Potash Inc. (IPI), Potash Corp. (POT), Agrium Inc. (AGU), Mosaic Co. (MOS), and the Market Vectors Agribusiness ETF (MOO). Fertilizer prices may benefit from this outlook as well.

Continue to Part 5

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